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Methods for Detailed Analysis G-103 5.6 Representation of Benefit-Cost Findings 5.6.1 Overview The previous step calculated various measures of carrier, shipper, economic, and societal ben- efits associated with rail freight investments. This final step discusses how these measures can be compared to project or program costs and portrayed in ways that are relevant to the perspective of different affected groups. 5.6.2 Components Four general approaches are most commonly used to assess and compare the relative benefits and costs of proposed transportation projects. They are 1. Cost-benefit analysis, 2. Cost-effectiveness analysis, 3. Data envelopment analysis, and 4. Multi-criteria assessment analysis. These four types of analysis are discussed here as alternative methods, although they are not mutually exclusive, and each of these analysis approaches can be applicable for a different type of situation. 5.6.3 Background The cost of implementing rail freight solutions and the various categories of benefit from doing so are not always simple to compare. Exhibit 5-6 can be viewed as a "checklist" of infor- mation the analyst may need to represent the full benefits of rail freight projects. The difficulties presented by these various cost and benefit considerations are that Some of these factors can be measured in quantifiable numbers more easily than others, Some of these factors can be monetized in dollar terms more easily than others, and The incidence of cost and benefits for various parties can be politically sensitive. These difficulties are the major reason why four different approaches are discussed here for comparing the relative benefits and costs of rail freight projects and policies. Exhibit 5-6. Categories of Potential Project Benefits and Costs.

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G-104 Guidebook for Assessing Rail Freight Solutions to Roadway Congestion 5.6.4 Factors The overall value and usefulness of implementing rail freight solutions to road congestion depends on a set of common factors: The magnitude of congestion reduction that it achieves and the value of that impact; The effect that it will have on freight transportation cost or service quality for carriers and ship- pers, and the relative value of the impact on those parties; The value of environmental and quality of life impacts on the general public; The cost of implementing the project or policy and the incidence of those costs for various pub- lic agencies, private organizations, and the general public. All of these factors are considered in the four alternative methods presented here. 5.6.5 Methods Alternative 1 Benefit-Cost Analysis (BCA) BCA is the traditional method used by economists for assessing the social value of investments. (It is sometimes also referred to as Cost-Benefit Analysis or CBA.) It examines the benefits and costs associated with a particular project and reports results in terms of two measures: Net Benefit = Gross Benefit Gross Cost Benefit/Cost Ratio = Gross Benefit/Gross Cost Thus, a benefit-cost (B/C) ratio of 1.5 implies that each $1.00 of project investment will yield benefits valued at $1.50. Benefit-cost analyses are used in two general ways: (1) to determine whether or not the benefits associated with a project are sufficient to justify project spending (i.e., the B/C ratio is greater than 1.0); and (2) to rank proposed projects in terms of their return on investment (e.g., a project with a B/C ratio of 1.5 has a higher return per dollar invested than a project with a B-C ratio of 1.4 and a lower return than a project with a B-C ratio of 1.6). Benefit-cost studies, however, are limited by the requirement that only costs and benefits that can be monetized can be included in analysis. This creates two fundamental limitations. First, a number of important benefits associated with transportation investments either cannot be monetized (e.g., the social benefit of economic development in low-income areas) or are very difficult to monetize (e.g., more frequent rail stops). Second, results from BCAs are sensitive to judgments about valuation of different benefits. For example, historically EPA and DOT have used different valuations of the expenditures that can be justified by the expected elimination of a premature death, with EPA using $4.8 million and DOT using $2.6 million (DOT, 2000). In general, there is no consensus on "correct" valuation of such benefits and evaluation of projects will be sensitive to analysts' decisions about the proper valuation. There are two basic shortcomings in the use of BCA for evaluation of rail freight projects. The first is that BCA is designed to aggregate all benefits and all costs for society, without regard to their incidence. In the case of integrating highway and rail investment, the different roles of pub- lic agency investment for roads and private investment in railroad functions should be recog- nized and considered in evaluating opportunities for "win-win" propositions in public-private partnerships. BCA tools for highway-oriented projects include STEAM, StratBENCOST, Cal-B/C, NET_BC and MicroBenCost. Available tools for BCA of rail-oriented projects include RAILDEC. A more general BCA framework that covers both rail and highway projects is the newer TREDIS system. Further details on BCA tools and methods are available from existing documents that are widely available:

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Methods for Detailed Analysis G-105 Caltrans Transportation Benefit-Cost Analysis web site http://www.dot.ca.gov/hq/tpp/offices/ote/Benefit_Cost/index.html FHWA Cost-Benefit Forecasting Toolbox web site http://www.fhwa.dot.gov/planning/toolbox/costbenefit_forecasting.htm Transport Canada Guide to Benefit-Cost Analysis http://www.tc.gc.ca/finance/bca/en/bca.pdf FHWA Asset Management: Economic Analysis Primer http://www.fhwa.dot.gov/infrastructure/asstmgmt/primer.htm Alternative 2 Cost-Effectiveness Analysis (CEA) CEA differs from BCA in that it does not seek to evaluate all positive and negative impacts simultaneously, and it does not require that all positive and negative effects be boiled down to a common measure of dollars. Rather, CEA compares the effectiveness of project alternatives in achieving various individual indicators of desired benefits. For example, CEA can portray the cost per ton of emissions reduction or the cost per thousand passengers carried. If most of the costs can be expressed in monetary terms and if most of the benefits can be quan- tified at least in non-monetary terms, then it is possible to use measures of cost-effectiveness that show the cost per unit benefit. This makes it possible to compare different designs and entirely different approaches to achieving quantitative, non-financial goals such as improving air qual- ity and reducing congestion. However, CEA is limited because it examines single dimensions of impact that may affect different parties (e.g., shippers or transportation providers) and it still does not differentiate the coincidence of costs. In the context of this guide, CEA can be applicable if the primary goals of rail freight solutions are focused solely on reducing aggregate vehicle-time or reducing emissions. However, if the analysis seeks to examine broader impacts on carriers, shippers, and the general public, then the other methods are more applicable. Alternative 3 Data Envelopment Analysis (DEA) DEA is related to CEA in that it attempts to compare the effectiveness of alternative projects or programs in achieving results that can be measured, but not in monetary terms. Basically, DEA is a form of graphical analysis that simultaneously displays the effectiveness of alternatives in achieving multiple criteria. This makes it possible to identify alternatives that are clearly supe- rior to other alternatives at all spending levels, those that can provide greater benefits along all dimensions per dollar of spending at certain levels of implementation, and those alternatives that provide tradeoffs in results. In public funding of transportation projects, it is seldom possible to reduce the analysis to financial terms, and it will even be difficult to quantify some of the costs and benefits. Therefore, a more elaborate scheme is needed to allow rating of multiple criteria with attention to incidence. Alternative 4 Multi-Criteria Analysis (MCA) The shortcomings of BCA have led to the creation of methodologies that can more easily accommodate and evaluate a range of monetizable and non-monetizable benefits. Chief among these newer methodologies is multi-criteria analysis (MCA), which attempts to consider all ben- efits associated with a project and weight them according to their importance. This approach is aimed at producing a comprehensive assessment of project benefits. Employing MCA requires that analysts identify all benefits--including those which can be monetized (e.g., reduction in air pollution control costs), those that cannot be monetized but can be expressed with quantitative metrics (e.g., the number of jobs that relocate from high- to lower income areas), and those that cannot be expressed with quantitative measures (e.g., civic pride associated with state-of-the art transportation infrastructure)--and a ranking to weight benefits according to their relative

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G-106 Guidebook for Assessing Rail Freight Solutions to Roadway Congestion Exhibit 5-7. Using Multi-Criteria Analysis (MCA): An Example. importance. A key example of this last kind of measure is the safety risk perceived by motorists who share the road with large trucks, especially when trucks form a material component of the traffic stream. Quite apart from actual safety performance, these perceptions carry weight in pub- lic opinion. MCA has become increasingly popular for transportation "project appraisal" by transportation agencies in Europe and by the World Bank, because of its ability to account for broader societal impacts that cannot be monetized. Exhibit 5-7 provides an example that uses hypothetical data to illustrate how MCA is opera- tionalized. Three aspects are worth noting. First, MCA allows inclusion of variables not normally considered in BCA, such as the job cre- ation and civic pride dimensions just noted. Second, project rankings will depend on the weights (i.e., importance) attached to different vari- ables. In the example in Exhibit 5-7, Project 1 yields large reductions in air pollution and high levels of job creation, while Project 2 generates significant growth in personal income and tax revenues. Thus, in the first weighting scheme, which gives the highest weighting to tax revenues, Project 2 is the preferred project. Under weighting Scheme 2, however, where job creation and air pollution reductions are valued as highly as tax revenues, Project 1 scores higher. Third, variables such as civic pride, for which it is difficult to assign a quantitative value, might (as they are in the example) be reported but not used in calculating project scores. Including these variables in the reporting framework, however, could be important to decision makers in cases where competing projects have similar or identical assessment values. Like BCA, MCA has its limitations. For example, although it provides a more comprehen- sive way of ranking the benefits of alterative projects, it does not (by design) yield an estimate of the monetary value of a project's benefits. As such, it cannot be used to address whether a particular project has a B/C ratio of greater than one, or an adequate financial return on investment. It is possible, however, to use both BCA and MCA for project assessment. For example, an analyst could use BCA to determine which of a set of projects has a B/C ratio of greater than 1.0

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Methods for Detailed Analysis G-107 and thus, can be justified based on quantifiable benefits and costs. After BCA is used to identify economically feasible/attractive projects, MCA could be used to select the project likely to yield the highest total (monetizable and non-monetizable) benefits. TransDec (Transportation Decision Analysis Software) was developed as part of NCHRP Proj- ect 20-29 (2) to assist public officials in implementing multi-criteria analysis for multi-modal transportation investment decisions. It also specifically distinguishes freight from passenger trans- portation effects. It is designed for evaluating transportation investments on the basis of multiple goals tied to specific objectives and values. The following types of goals might be considered: improve mobility, improve connectivity, increase cost-effectiveness, increase energy efficiency, improve air quality, reduce resource impact, reduce noise impact, improve accessibility, reduce neighborhood impact, and improve the economy.xxiv Assessing the Distribution of Benefit and Cost Results Methods described above provide guidance on how to evaluate the overall costs and benefits associated with projects. For many rail freight or other transportation projects, however, a set of related questions is just as significant: namely the proportion of costs and benefits that accrue to different groups. This is especially important where private interests, such as railroads, are seek- ing public funds for investments; where local or state governments are seeking federal funds; or where private, local, state, and federal interests are trying to determine the appropriate alloca- Exhibit 5-8. Cost-Benefit Accounting. xxiv NCHRP Research Results Digest 258.

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G-108 Guidebook for Assessing Rail Freight Solutions to Roadway Congestion tion of project costs. In these cases, there are multiple benefit-cost ratios, each of which describes a different perspective or viewpoint. This is presented schematically in Exhibit 5-8, which portrays the different types of operating benefits and capital costs associated with rail freight projects, as well as the benefit-cost viewpoints that can be relevant for project assessment. Five viewpoints are relevant--private sector, govern- ment, public, national social benefit, and state/regional social benefit. These can be measured in the following ways: Private Sector. For rail freight projects, the relevant private sectors include railroads, truck- ing companies, and shippers. Private sector benefits include reduction in operating costs and increased revenue. Ideally, change in profit levels (which captures changes in both output and revenue per unit of output) will be used and compared to investment costs to yield an esti- mate of return on investment (ROI). The ROI, when annualized, should be greater than the current interest rate, which proxies for cost of capital as well as the return on capital if it were invested in a no-risk asset (e.g., certificates of deposit). In cases where effect on profits is difficult to estimate or where railroads, trucking companies, and shippers have objectives other than profit maximization, then the other metrics above might be more useful. Common objectives for private actors include maximizing sales or gain- ing market share when establishing a new market or product line. In the highly competitive rail sector, sales growth is often an important objective. In these cases, the appropriate meas- ure could be volume or market share. Private sector costs are the investments made by railroads, trucking companies, shippers, and private operators in the project itself or in accessing the project benefits. Government. The direct benefits to government are the highway maintenance and operat- ing cost reductions associated with reduced congestion; the reduction, avoidance, or deferral of new highway lane construction; and the increased tax revenues from increased business output and personal income. The costs are the government portion of the project investment costs. Depending on the funding scheme for a project, analysis of more than one level of government (e.g., local, state, and federal) could be required. In all cases, it is important to compare investment costs by level of government with benefits that accrue to that level of government. This could require, for example, estimating the portion of maintenance and operating costs paid by state and federal DOTs and estimating local, state, and federal tax impacts. Costs to government are generally confined to project costs and, if relevant, any increase in operations and maintenance of transportation infrastructure. In multi-jurisdictional projects, the distribution of costs can differ from the distribution of benefits, which is important for the managing agency to recognize. Public. Public benefits can be defined narrowly or broadly, depending on the needs of the analysis. The narrow definition includes the value of changes in congestion, environmental quality, and other quality-of-life considerations (e.g., noise). The broad definition of public recognizes also the costs and benefits that accrue to taxpayers and includes the effects of trans- portation investments on tax revenues and government spending. For projects that involve more than one level of government (e.g., state and federal) public costs and benefits can be calculated for the state and national levels. Under narrow definitions, there are few, if any, public-sector costs (perhaps, for example, the inconvenience and noise associated with large-scale transportation projects). Under the broader definition, public-sector costs would include costs to local, state, and/or federal gov- ernments for project investment and, if relevant, any increase in operations and maintenance of transportation infrastructure. Societal Benefits (National). The national societal benefit is defined as the sum of the social benefits (congestion, safety, air pollution, and noise) and the net national economic and fiscal

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Methods for Detailed Analysis G-109 impacts. To estimate net national economic impacts (as described above), the user should include only those benefits that can be tied to increases in productivity and should ignore eco- nomic impacts that are the result of shifts in business location to the affected project area from other parts of the United States. A portion of economic impacts associated with increased trade and foreign direct investment can also be considered as net national impacts. Unfortunately, it is difficult to estimate the portion of new trade and investment activity in the project area that represents new activity in the United States, rather than a shift from other parts of the country, and the types of macroeconomic models that are otherwise useful for transportation analysis offer little guidance. As such, analysts will likely have to estimate this portion or survey local businesses to assess the proportions of their competition that are national and international. National social costs would include all private and government spending on project invest- ment and, if relevant, any increase in the costs of construction, operation, and maintenance of transportation infrastructure. Societal (State or Local). The state (or local) social benefit includes all social, economic, and fiscal benefits that accrue to the state. Unlike calculations for assessment of national social ben- efits, the analyst does not need to be concerned with economic benefits that represent shifts in activity from the rest of the United States. From the perspective of the state, all new eco- nomic activity is a gain, regardless of whether it decreases activity in other parts of the United States. State or local social costs would include spending on project investment by local/state firms and the local/state government, as well as any increase in operations and maintenance of trans- portation infrastructure paid for by local/state governments. Portraying Cost and Benefit Incidence The basic format for measuring and portraying benefits and costs is as shown in Exhibit 5-9. This format shows the incidence of various time, cost, safety, and production-related benefits for carriers ("transportation system efficiency"), users ("user cost savings benefit"), and society ("total benefit"). This format is most useful when a breakdown of costs and benefits by general category is needed. There are cases where it is also important that costs and benefits be presented in a way that contributes to negotiations and decisions regarding which affected parties should bear the costs. In these cases, a more detailed format, like the one presented in Exhibit 5-10, may be warranted. This table reports costs and benefits by group (e.g., public versus private) and type of benefit Exhibit 5-9. Summary of Benefits and Costs at a Societal Level.

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G-110 Guidebook for Assessing Rail Freight Solutions to Roadway Congestion Project Benefits First Year Net Present Benefit ($) Value ($) KEY Private costs/benefits TRANSPORT CARRIERS Public (non-Gov't) C/B Public (Gov't) C/B Rail Net Revenue Truck Net Revenue BC BENEFIT COST Intermodal Net Revenue Private Shipper/Logistics Net Revenue Public Fiscal Social INDUSTRY SHIPPERS & RECEIVERS Industry Transport Costs Logistics Costs Production Costs Consumers Prices/Consumer Surplus EXTERNALITIES (IMPACTS ON NON-FREIGHT) Congestion Personal Travel--vehicle time Business--vehicle time Personal Travel--operating cost Business--operating costs Emissions ($ value of tons/year) Safety/Accidents ($ value) ECONOMIC DEVELOPMENT Income in Transportation Sectors Income in Non-transport Sectors Total sales (D,I,I) in Trans Sector Total sales in Non-trans sector GOVERNMENT Construction and Maintenance Operating Costs Tax Revenue Project Costs Cost Per Yr Net Pres Val Government Railroads Trucking Companies Shippers/Logistics Other Exhibit 5-10. Breakdown of Benefit and Cost Incidence Among Various Parties. (e.g., environmental versus economic development). The latter can be useful if public funding may come from multiple governmental agencies, in which case, information about the contri- bution of a project to different agencies' missions could be useful in negotiations. Getting parties to agree on risk sharing is also important. A common problem in benefit-cost estimation and accounting is double-counting of bene- fits. Two potential sources of double-counting are as follows: Change in costs. All costs reductions at carriers are realized as either increased profits for the carriers or price reductions for shippers. Research to date has not been able to establish defini- tively the likely split between profits and prices from cost changes, and it will vary with market conditions. Cost reductions in the rail and trucking freight sectors often get translated into price reductions for shippers, but the extent to which that occurs depends on the commodity and competitiveness of specific routes (General Accounting Office, 2002). When modeling impacts, it is important not to double-count the impacts of cost reductions. As such, the analyst should

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Methods for Detailed Analysis G-111 model cost reductions by reducing the cost of doing business at carriers or by reducing the cost of doing business for shippers in an economic simulation model. When cost reductions are modeled as a change to carriers' cost-of-doing-business, the model will estimate some increase in demand for carrier services. When cost reductions are modeled as a change to shippers' cost- of-doing-business, the model will estimate impacts on shipper output as well as the change in goods and services purchased to meet new output demands. Transportation is one of the goods and services purchased by shippers. Regional versus national economic impacts. As discussed earlier, some of the growth in eco- nomic activity in areas with improved infrastructure investment will represent a shift in business activities (e.g., sales and output) from other parts of the United States. These generally should not be considered in estimates of national economic gains from transportation investment. Typically, analysts will have to estimate using whatever local information is available the portion of activity that likely represents a shift in national activity, rather than a net gain. For the portion of new busi- ness activity realized by increases in international trade or foreign direct investment, a larger por- tion can be considered as new national activity. 5.6.6 Required Resources Portraying incidence of benefits and costs associated with rail freight solutions can go far beyond the direct project cost and the direct effect on congestion levels. It can be shown at many levels, ranging from an overall benefit/cost ratio to a detailed breakdown of the incidence of who pays the various costs and who receives the various elements of benefit. The choice of how to measure and portray these impacts will depend on the particular project situation and the par- ties involved. At the simplest level, a spreadsheet process may suffice. At the other extreme, a series of rail performance and highway network simulation models could be used and linked to a regional economic model to calculate overall impacts, and the results then put into a separate benefit/cost analysis system to calculate the net present value of benefits and costs.